Why property assessment methods matter?

It is common knowledge that local governments in general rely heavily on property tax as a major source of revenue. Typically, school districts and counties rely more on property tax relative to cities. Nonetheless, the importance of this local source of revenue makes it a key issue for debate and discussion. Broadly, property tax revenue is determined by two factors, the taxable base and the property tax levy rate. The taxable base is based on the assessed value of property in four major classes – residential, commercial, industrial and agricultural. While residential property accounts for a large portion, the rest three classes of property are as important, especially in urban areas and small regional hubs, in rural parts of a state. Commercial property which includes retail establishments are also a key component of the tax base.

The method used to arrive at the value of a property is different by class. While residential property value is tied to the market value and is relatively simple, other classes value assessment can be complex. Depending on the method, the valuation estimates tend to vary, sometimes by significant amounts.

Across the nation, there are growing instances of commercial property owners challenging the accuracy of valuation methods. Especially, big box retailers in recent past have been successful at not just questioning the accuracy of the valuation method, but have been successful at changing the methods to lower the valuation estimates, thereby paying lower amounts of property tax. “Big-box retailers argue that the market value of their commercial property should be the sale price of similarly sized but vacant retail buildings. They point out that these buildings are extremely hard to sell as-is once the retailer moves out. They tend to sit empty for long periods. Thus, the assertion is, they aren’t worth nearly as much as local tax assessors have traditionally assumed in valuing the property.” (Governing.com, Sept, 2016)

Referred to as the ‘dark-store’ strategy, there is evidence of big retailers in states including Michigan, Alabama, Iowa, Florida and Indiana, North Carolina, Ohio, Tennessee, Washington and Wisconsin successfully trying to lower assessed valuation for tax purposes. This is putting a severe dent into the revenue stream of local governments and putting them in a situation to cut services and make other adjustments.

Given the complexity of property tax assessment and the differences in appraisal laws between states, it has been tricky for lawmakers to come up with legislative solutions that can assist local governments to respond to this situation. While some states have already done and others are considering laws to protect the local governments, this ongoing process has already financially hurt a number of communities.

Given how critical the issue is, we certainly will hear a lot more of this in coming months and years.